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The state’s innovation support must be significantly increased to accelerate economic development

TALLINN, 8 December 2014 – The National Audit Office has found that the economic impact of the 166 million euros of support paid out from 2007-2013 to further companies’ innovativeness and capacity for growth has been limited and random. Only half of the six main measures aimed at supporting innovation helped the supported companies to achieve better results in terms of increasing exports or added value than companies that received no support.

Innovation is more than coming up with new things or incurring research and development costs – it is primarily the achievement of economic benefits with the help of innovation. Successful innovation should give companies a competitive advantage and increase their sales revenue, their export capacity or the added value of their products and services. This in turn makes it possible to earn more profit, which can then be invested in the expansion of the company, including in the creation of highly paid jobs.

The success of supporting innovation does not depend on direct support alone.

The National Audit Office is of the opinion that any increase in the impact of innovation support is curbed by the fragmentation of the state’s innovation policy and the associated dispersal of responsibility. Attempts are made to achieve results in the economy and, for example, science at the same time. The current management of the state’s innovation policy does not lack consultation – it is short of focus, detailed knowledge and decision-making competence.The audit revealed that although supporting and developing innovation has been considered important to the state, the state’s development documents still contain no clear definition of the integrated impact the state wants to achieve by supporting innovation. This is why, at present, it is relatively difficult to give a reliable opinion of the state’s activities in the development of the Estonian innovation system as a whole.

Input and output goals are predominantly used in the assessment of the objectives of research and innovation policy. Increases in research and development expenditure, the amounts of support distributed and dazzling success stories are often presented to the public, which creates the impression that the state has achieved the expected results of the support. Unfortunately, evaluation based on input and output does not give a complete picture of the impact that innovation support has on economic development.According to Tarmo Olgo, Director of Audit of the Performance Audit Department, it is worrying that the state has allocated money to innovation, research and development with the best of intentions but that the audit results reveal that this has not helped the supported companies achieve remarkably better financial results or the acceleration needed to achieve the state’s economic goals. The limited impact of innovation support is worrying in a situation where the most recent Competitiveness Report of the World Economic Forum ranked Estonia among countries whose further development should be driven, above all, by innovation.

Innovation support should amplify the financial results of the companies supported, as companies that have already proven themselves are generally preferred when support of this type is granted, or the support may also go to companies who are ahead of their competitors in terms of technological development or intellectual potential at the time they apply for the support. The analysis of the financial results carried out in the course of the audit highlighted that a year or two after the support ends, the results of the supported companies are statistically no different from the results of companies who did not receive support in terms of either success or failure. An extensive survey of companies was carried out in the course of the audit (3519 companies surveyed, with a response rate of ca 50%) which indicated that enterprises both over- and underestimate the actual impact of the support compared to the actual results.However, the positive opinions of companies can be considered a sign that the actual impact of support on financial indicators has not yet become evident. Looking to the future, the state must clearly assess which macroeconomic changes are realistic with the new support that is being planned.

The National Audit Office has recommended the following to increase the impact of innovation support:

1) to emphasise the importance of innovation policy and to involve the Riigikogu in the development and supervision of the implementation of the policy;2) to agree on what realistic impact is expected from the innovation support, both as single measures and in confluence in the Estonian innovation system;3) to determine who is responsible for the achievement of the final goals of the innovation policy and the efficient coordination of the implementation of the policy;4) to guarantee that Enterprise Estonia (EAS) is prepared to develop and provide support that is focussed on the client; and5) to observe that the state’s participation in offering risk capital has a positive impact on the achievement of the economic (incl. innovation policy) goals established.

Olgo said: “The issue in the distribution of support, innovation support in particular, is not who can distribute more support or do so faster. As the amount of money is decreasing, success belongs to those who are smarter in distributing it. Past lessons in distributing innovation support indicate that increasing the impact of support requires extra effort, wisdom and a systematic approach from both entrepreneurs and the state.”

The Minister of Foreign Trade and Entrepreneurship promised to take account of the recommendations made by the National Audit Office concerning innovative public procurements and the need to organise management of the area more efficiently, but disagreed about the approach to the effectiveness of the support. In 2014 the Ministry of Economic Affairs and Communications (MEAC) and EAS completed the interim assessment of enterprise and innovation support using methodology different from that of the National Audit Office and therefore obtained somewhat different results (see Table 2), with the impact becoming evident in more aspects than found by the National Audit Office.

Whilst the National Audit Office used the national statistical data of Estonia in its work, the MEAC and EAS based their interim assessment of 2007-2013 on data obtained from the annual reports of companies. This gave a larger quantity of data for analysis and, in the opinion of the authors, also a better quality of data. EAS also used an advanced statistical method to obtain the results. The interim assessment prepared by the MEAC and EAS indicated that some support measures had a positive impact on sales turnover, profit and number of employees, but the support does not help to increase added value or exports.

The other auditees had different opinions. The Minister of Finance, the State Secretary and the Minister of Education and Research expressed their doubts about the results of the audit. The Development Fund, however, feels that the audit gives a true view of the situation in innovation support.

During the 2007-2013 budget period the total budget for the development of the innovation and growth capacity of enterprise was 616.2 million euros, 424 million of which was contributed from the structural funds. The amount paid out from the innovation support measure budget covered by the audit as at April 2013 was ca 166 million euros, while the liabilities that had been assumed amounted to 277 million.

Support is mainly distributed by EAS and the KredEx foundation.

In the period of 2007-2013 support was granted to enterprise on a broad basis and no preference was given according to growth capacity or to certain groups of companies. The state would like the offered measures to increase the capacity of companies to succeed on international markets and to stimulate cooperation between companies as well as between companies and research organisations.

The National Audit Office assessed the changes in the financial indicators of support recipients within one or two years of the completion of the supported project, depending on the measure. The support remained in the period of 2004-2011. When assessing the impact of support quantitatively, the National Audit Office assessed the financial indicators of companies in two similar groups with the help of Statistics Estonia. The difference between the companies was that some received support from the state and others did not (control group). In addition to the quantitative part of impact assessment, we also assessed the qualitative impact of the support on the basis of the responses the entrepreneurs had given to the questionnaire issued by Statistics Estonia (which was sent to 3519 companies, with a response rate of 47% among those who had received support and 50% among the control group).

Situation of Estonia’s economy and observations

The goal established in the Estonian Competitiveness Plan ‘Estonia 2020’ is to raise the macroeconomic indicators of Estonia to the same level as the European average and beyond. This is an increasingly complicated task considering the demographic changes in Estonia and the complex foreign trade environment. The size and structure of the Estonian economy set limits on our development speed. The achievement of higher productivity requires increasing the share of high-tech sectors in the economy, where little progress has been made to date. The most productive part of the Estonian economy is at the same level as the less productive sectors of, for example, Germany, Belgium and France. The productivity of the Estonian economy within sectors is also noticeably lagging behind.However, the structure of the Estonian economy has changed gradually over the last 10 years. The proportion of economic sectors with lower added value and less competitiveness (e.g. the textiles industry) has decreased in the total added value of the economy. The proportion of the so-called new economy (information and programming) has increased somewhat at the same time. Less efficient activities have decreased gradually as a result of international competition and economic shocks, while the share of activities of higher added value has increased in the economy. Compared to 2005, added value per employee had increased by 60% by 2012.Labour productivity in Estonia, when expressed as hourly productivity, is higher than in Poland, Lithuania and Latvia, for instance. However, it is still many times lower than the EU average.Irrespective of the positive changes in the structure of the Estonian economy, it is still dominated by small and medium-sized low-tech companies whose need for research and development is limited. Only a few companies are engaged in research and development and cooperating with universities: 90% of research and development expenses in Estonia are incurred by fewer than 100 companies.